A social investment bond is a handy notion for a recession: it puts any spare money to temporary good use locally. Individuals, companies and charitable foundations that can afford to, donate a sum for five years in the bond, which funds community-minded projects. The money is then returned to the donor intact. There is no profit or interest payment, but buying a bond has attractions for altruists and it could help turn the "big society" ambitions of David Cameron into something real.

Actor Michael Palin, author Margaret Drabble, MP David Blunkett and hundreds of not so well-known Sheffielders have invested nearly £2m in their city through two bond issues. Across the country more than £20m has been raised in bonds since the first was issued in Sheffield in 1999.

Supported by the city council, the first issue raised £800,000 for job creation and housing schemes in Sheffield. Citylife, the Cambridge-based charity behind social investment bonds, lent the money to social housing providers that used the interest and charitable tax benefits as seed-corn funding for new jobs.

Among the first beneficiaries was Caroline Channer whose business start-up loan led to a thriving African-Caribbean hairdresser's. "If it hadn't been for the bond, I'd still be on the social. Instead, I'm ambitious now," she said at the time.

Social housing provider Places for People got the money to build affordable homes on two big estates: Manor, where £900,000 completed a funding package for 10 houses; and Norfolk Park, where £700,000 paid for nine bungalows. Both developments came with training schemes in building skills for local people.

The bond was given extra muscle by £1,000,000 in match-funding and Citylife had no hesitation about issuing a second offer in 2005. This bond focused on financial inclusion, a challenge whose scale is obvious when you visit the offices of Sheffield Credit Union and its loan partner Moneyline. The queue of customers winds out of the door and along to the stairwell. These are just some of the 5,000 clients whose tie-in with the service keeps them out of the hands of loan sharks and, potentially, the courts and debt bailiffs.

Moneyline's chief executive, Eric Thompson, says: "The £110,000 grant we've been given thanks to the second bond has been invaluable. We decided to treat it as capital and, with our average loan standing at £350, you can imagine how many people that is helping."

The group says it has helped 500 people to create a savings pool of more than £150,000. The sum is such a substantial part of Moneyline's overall pot that it has given its loan system the nearest thing to a continuously recyclable fund. "With no interest due, and no paying back of the grant, we think we can keep it intact through modest interest and repayments, and so keep paying out loans indefinitely. I reckon the original £110k has already turned over at least three times," says Thompson.

The city's Centre for Full Employment benefited from a loan for 12 months, during which it helped almost 2,000 people, 694 of them out of work for more than 12 months, with job applications and mock interviews. Mavis Turner, 60, says the scheme rebuilt her confidence: "I thought I'd never work again, but they were fantastic. I always felt welcome and nothing was too much trouble."

Her success in getting back into catering was mirrored by another 695 people who found jobs and 185 who started in newly-created posts. Those helped include 143 ex-offenders, 22 homeless people and 95 refugees.

Social bonds have spread to other areas including Newcastle upon Tyne, the former coalfields of south Wales and Cambridge, where £2,500,000 has just been loaned by the TTP Group to fund an innovation centre for social and environmental enterprise.

Now Citylife is tackling its biggest challenge: a bond of up to £20m for east London, which aims to draw on the wealth in other parts of the capital.

The East London Bond hopes to see more social housing provision by Places for People, while other community work will be co-ordinated by the Bromley by Bow centre and Community Link charity. The prospectus ranges from support for start-up businesses and the jobless to reviving youth clubs and shouting for local people to have their share of the 2012 Olympic Games' legacy.

Subscriptions close at the end of this week and so far include £100,000 each from the City corporation's Bridge Trust and social enterprise specialists the Apax Foundation, and two companies – Vitabiotics and Winterflood Securities – but the total is still well short of its target. Citylife's chief executive, Tim Jones, says: "It hasn't been easy, probably because the scale is so much bigger. I'm not sure how far there is a 'London community' but if we succeed it will help to encourage one."

David Blunkett points to Sheffield's lustrous history of public subscriptions as precursors of social investment bonds: "Look at Sheffield University, our greatest exemplar. It was founded by public subscription – including many individuals' pennies as well as the wealthier's generous pounds – which raised an astonishing sum, the equivalent of £15m today."

Blunkett is a firm believer in the bonds' appeal of paying all the money back, as against straightforward charitable gifts. "A lot of people cannot afford to give away money completely, or want to keep it for their children," he says. "The brilliance of bonds, as shown here in Sheffield, is that you can do both. Put your money to good use, as many times as you want, and then get it back again."

Interestingly, a number of his fellow Yorkshiremen and women have gone a step further, by declining to accept repayment on the five-year redemption date.